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PFP Chapter 3
Terms in this set (11)
what is the time value of money? How is it related to opportunity cost?
more than a dollar received tomorrow because it can be saved and earn interest.
The time value of money
is a measure of the opportunity cost of spending a dollar.
The time value of money concept is most commonly applied to
single dollar amounts (annuities) , where both present and future values can be determined.
An annuity is
a stream of equal payments that are received or paid at a determined interval
compounding is the
process by which the money you are holding accumulates interest over time
compounding can help you
forecast the funds that will be available to you at retirement
What two methods can be used to calculate future values are
future value interest factors or financial calculator
Determining the present value of an amount is useful when you want to
-know how much money to set aside to have a specific amount in retirement
-know how much money to set aside to have money for a vacation in two years
-have 20,000 for a down payment on a house in three years
the formula used to determine the present value of an annuity is
The formula used to determine the present value of an annuity is: Present value of an annuity = regular payment ' present value interest factor for an annuity i,nb for an interest rate i and a number of periods n (PVIFA).
The present value of annuity indicates what a series of
individual cash flows is worth to you now if you can invest your funds at an interest rate
How would you modify the future value of an annuity (FVA) equation to determine what you need to save each month to have a specific amount at a specific time in the future.
the future value of an annuity equals the payment times the future value interest factor for an annuity i,n as in the following equation
FVA= PMT x FVIFA i,n
So the payment equals the future value of an annuity divided by the future value interest factor for an annuity i,n as in the following equation
PMT= FVA/FVIFA i,n
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